Medical Loss Ratios and Commissions

People don’t like uncertainty. In times of change, however, the unknown dominates the landscape. For health insurance brokers, the new health care reform legislation has created uncertainty of gargantuan proportions. Chief among the questions as yet unanswered:  will the medical loss ratio requirements contained in the Patient Protection and Affordable Care Act result in such severe reductions that brokers will need to leave the health insurance market?.

The import of this question is not a function of greed or avarice. Lots of people make a lot of money from health care. Mother Teresas are few and far between. America spends roughly $2.3 trillion on health care costs – roughly 16 percent of he nation’s GDP.  Hundreds of thousands of people put food on the their tables, roofs over their heads, and keep up with the Joneses by earning their share of these dollars. There’s nothing wrong with that. And there’s nothing wrong with professionals earning a living by helping consumers find the right health care plan, navigate the system, advocate on their behalf when problems arise, and keep them informed of new products and changes to the industry that may impact them.

After all, we’re not talking about selling iced coffee here. Health insurance is complicated, expensive, shopped for rarely and both personal and critical to a family’s health and financial wellbeing. When it comes to making decisions on products or services like health insurance, consumers – whether buying for themselves or for their company and its employees – want and need expertise. And that expertise is best delivered by professional, licensed health insurance brokers. (While there are legal differences among the terms “agent,” “broker” and “producer,” I am using them interchangeably here).

Don’t take my word for it. A lot of Insurance Commissioners agree. The National Association of Insurance Commissioners just passed a resolution calling on federal policymakers to “acknowledge the critical role of producers and to establish standards for the exchanges so that insurance professionals will continue to be adequately compensated for the services they provide.” (NAIC Resolution “To Protect the Ability of Licensed Insurance Professionals to Continue to Serve the Public,” adopted August 17, 2010). The Commissioners are concerned that the creation of “Navigators,” as called for in the PPACA, to help consumers use the new health insurance exchanges to be available by 2014 “could provide an avenue for untrained individuals to evade producer licensing requirements and expose consumers to harm.” But their appreciation of the role played by brokers goes beyond the context of exchanges. The NAIC is saying that consumers – and regulators – benefit from the involvement of professional brokers.

Which brings us to the medical loss ratio provisions of the new health care reform legislation. By limiting the percentage of premiums carriers can spend on administrative costs to 20 percent for individual and small group policies (and 15 percent for large group contracts) broker compensation will, by necessity be reduced. The math is simple, especially as it concerns individual health insurance policies. Carriers with a decent block of business need 7-to-9 percent of premium for administrative costs. They would like to make (but don’t usually) 4-to-5 percent on this business. That leaves 6-to-9 percent for distribution costs. Given that in some states the first year commission on individual policies is 20 percent declining to 5-to-10 percent for renewals, we’re talking about a significant pay cut here.

Maybe. Because an argument can be made that commissions shouldn’t even be part of the medical loss ratio calculation. Here’s the theory:

The intent of the MLR requirement is to reduce non-medically-related costs in the health care system and to prevent carriers from reaping windfall profits when consumers are required to obtain health insurance coverage. Fine, but as applied to broker commissions, the minimum medical loss ratio requirements may actually increase overall administrative costs. Commissions are paid by consumers (whether individuals or employers). Today carriers collect these funds and pass 100 percent of them along to an independent third-party – producers. Health insurance companies don’t benefit from these dollars. They are providing an administrative convenience to their members and to their distribution partners – a convenience that reduces overall cost in the system.

Instead of consumers and business owners having to prepare, mail and track separate checks to brokers, carriers do the work. (Similar to how carriers aggregate claims owed to a hospital into a single payment as opposed to requiring each consumer to pay 100 percent of their hospital bill and then get reimbursed by the insurance company). And because of their infrastructure, carriers can accomplish this task more cost effectively. Brokers meanwhile receive one check for multiple clients, another administrative savings.

Given that the health plans are not benefiting from the commissions, but that having them collect the funds reduces overall costs, one could argue that commissions should not be part of the MLR calculation at all. As with some taxes, commissions should simply be outside the medical loss ratio calculation. And that argument is being made – and heard.

Several carriers found this idea intriguing, but it is the National Association of Health Underwriters that has spearheaded the effort to bring this concept to the attention of the NAIC. (The NAIC is responsible for establishing uniform definitions and methodologies for determining how medical loss ratios are calculated). And they have succeeded. As noted in the New York Times, “Some insurance commissioners seem sympathetic to the insurers’ arguments, including on the subject of how to treat broker commissions, which have historically been part of premiums. The insurers would exclude them from premium dollars, making it easier to meet the 80-cent minimum. The new standards ‘could potentially disrupt the availability of private health insurance, and do not take into account the integral role of health insurance agents,’ Kevin McCarty, the insurance commissioner for Florida, said last week in a letter sent to regulators.”

As noted in yesterday’s post, the NAIC has included broker commissions in the administrative cost section of the form they promulgated that will be used to capture the information used in calculating carriers’ spending on claims, health quality and administrative expenses. At first blush this would indicate that the NAIC has declined to exclude commissions from the medical loss ratio calculation. However, I’m told by people involved in the negotiations that the idea remains alive and could be included in future communications from the NAIC to the Secretary of Health and Human Services (who has to certify the NAIC’s medical loss ratio calculation proposal) when the NAIC provides the actual formula to be used.

Excluding commissions from the MLR calculation remains a long shot. That NAHU has pushed the idea as far along as it has is testimony to the respect with which the organization is held by Insurance Commissioners – and NAHU’s commitment to its membership. What’s significant, however, is that the idea has gained traction. As well it should. Because if commissions are cut too deeply, brokers will either abandon the market or negotiate separate compensation arrangements with their clients. Abandoning the market, as the NAIC resolution highlights, is not in the interest of consumers. And arranging for the payment of separate fees will result in greater administrative cost and more inconvenience for consumers. Far better, to simply remove producer compensation (which all the funds are paid to an entity completely independent from the carrier) from the MLR formula altogether.